W1

Question 1

Macroeconomics

Answer 1

the study of structure and performance of national economies and government policies that affect economic performance.

Question 2

Two main sources of Economic growth

Answer 2

Population growth; and

Increases in average labor productivity (output produced per employed worker

Question 3

Business cycles, upward and downward trend

Answer 3

Business cycle: Short-run contractions and expansions in economic activity.
Downward phase is called a recession/upward phase is called a boom.

Question 4

Unemployment

Answer 4

the number of people who are available for work and actively seeking work but cannot find jobs. Recessions cause unemployment rate to rise

Question 5

Inflation rate

Answer 5

the percentage increase in the level of prices.

Question 6

Deflation

Answer 6

when prices of most goods and services decline.

Question 7

Hyperinflation

Answer 7

an extremely high rate of inflation.

Question 8

Open economy

Answer 8

has extensive trading and financial relationships with other national economies.

Question 9

Closed economy

Answer 9

an economy that does not interact economically with the rest of the world.

Question 10

Trade surplus and deficit

Answer 10

Trade surplus: exports exceed imports.

Trade deficit: imports exceed exports.

Question 11

Fiscal policy

Answer 11

government spending and taxation

Question 12

Monetary policy

Answer 12

growth of money supply; IR-targeting

Question 13

Macro forecasting

Answer 13

Relatively few economists make forecasts.

Forecasting is very difficult.

Question 14

Macro analysis

Answer 14

Private and public sector economists—analyse current conditions.
Public sector employs many macroeconomic analysts who provide policy advice.

Question 15

Macro research goal

Answer 15

to make general statements about how the economy works.

Question 16

Theoretical and empirical research necessary for forecasting and economic analysis (2)

Answer 16

Economic theory: a set of ideas about the economy, organized in a logical framework.
Economic model: a simplified description of some aspect of the economy.

Question 17

Usefulness of (2)

Answer 17

Depends on

• reasonableness of assumptions
• possibility of being applied to real problems
• empirically testable implications
• theoretical results consistent with real-world data.

Question 18

5 Steps for Developing and Testing an Economic Theory

Answer 18

Step 1: State the research question.
Step 2: Make provisional assumptions.
Step 3: Work out the implications of the theory.
Step 4: Conduct an empirical analysis to compare the implications of the theory with the data.
Step 5: Evaluate the results of your comparisons.

Question 19

2 Disagreements

Answer 19

Classicals vs. Keynesians.

Question 20

classical approach (invisible hand, wages + prices, result)

Answer 20

• The “invisible hand”: the idea that if there are free markets and individuals conduct their economic affairs in their own best interests, the overall economy will work well.
• Wages and prices adjust rapidly to get to equilibrium.
  Changes in wages and prices are signals that coordinate people’s actions.
• Result: Government should have only a limited role in the economy.

Question 21

The Keynesian approach

Answer 21

Keynes: Persistent unemployment occurs because wages and prices adjust slowly, so markets remain out of equilibrium for long periods.

Therefore, Government should intervene to restore full employment.

Question 22

The evolution of the classical–Keynesian debate

Answer 22

• Keynesians dominated from WWII to 1970.
• Stagflation led to a classical comeback in the 1970s.
• Last 30 years: excellent research with both approaches.

Question 23

unified approach to macroeconomics using a single model: 3 markets, LR, SR

Answer 23

Three markets: goods, assets, labor.
Long run: wages and prices are perfectly flexible.
Short run: Classical case—flexible wages and prices; Keynesian case—wages and prices are slow to adjust.

Question 24

The National income accounts

Answer 24

accounting framework used to measure economic activity.

Question 25

Three alternative approaches

Answer 25

Product approach: the amount of output produced.
Income approach: the incomes generated by production.
Expenditure approach: the amount of spending by purchasers

Question 26

Expenditure approach (what is GDP)

Answer 26

“total spending on final goods and services produced within a nation during a specified period of time”

Question 27

income-expenditure identity

Answer 27

𝒀=𝑮𝑫𝑷=𝑪+𝑰+𝑮+𝑵𝑿

Question 28

Consumption

Answer 28

• Spending by domestic households on final G+S (including those produced abroad).

Question 29

3 categories of C

Answer 29

• Consumer durables (e.g., cars, TVs, furniture, major appliances).
• Nondurable goods (e.g., food, clothing, fuel).
• Services (e.g., education, health care, financial services, transportation).

Question 30

Investment (I)

Answer 30

Spending for new capital goods (fixed investment) plus inventory investment.

Question 31

3 major components (i)

Answer 31

• Business (or non-residential) fixed investment: spending by businesses on structures, equipment, and intellectual property products (i.e., software, research and development etc.).
• Residential fixed investment: spending on the construction of houses and apartment buildings.
• Inventory investment: increases in firms’ inventory holdings.

Question 32

Government purchases of G+S (G) AND examples of capital goods spending

Answer 32

Spending by the government on G+S.

• capital goods add to the nation’s capital stock (e.g., highways, airports, bridges, and water and sewer systems).

Question 33

Excluded GS (4)

Answer 33

• social Security payments
• welfare
• unemployment benefits.
• Interest payments on government debt.

Question 34

Net exports (NX)

Answer 34

Exports: goods produced in the country that are purchased by foreigners.

Imports: goods produced abroad that are purchased by residents in the country.

Imports are subtracted from GDP, as they represent goods produced abroad, and were included in consumption, investment, and government purchases.

Question 35

Real GDP

Answer 35

an estimate of the value of an economy’s final output, adjusting for changes in the overall price level.

Question 36

Real GDP growth EQ (s19)

[quarterly annualized GDP growth rates]

Answer 36

∆𝑌/𝑌=(𝑌(𝑡)/𝑌(𝑡−1) )^4−1

Question 37

price index

Answer 37

measures the average level of prices for some specified set of G+S, relative to the prices in a specified base year.

Question 38

GDP deflator

Answer 38

is a price index that measures the overall level of prices of G+S included in GDP

Question 39

GDP deflator EQ (S23)

Answer 39

Real GDP=(Nominal GDP)/(((GDP deflator)/100) )

THEREFORE,

GDP deflator=(Nominal GDP)/(Real GDP)×100

Question 40

consumer price index (CPI)

Answer 40

measures the prices of consumer goods (available at monthly frequency).

Question 41

Difference between GDP deflator and CPI measures

Answer 41

GDP deflator - measures the average level of prices of goods and services included in GDP.

CPI- measures the prices of consumer goods (available at monthly frequency).

Question 42

Changes in the CPI leads to an important macro variable _______

Answer 42

Inflation rate.

Question 43

inflation rate (S24)

Answer 43

𝜋_𝑡=((𝑃_𝑡−𝑃_(𝑡−1) ))/𝑃_𝑡 =(∆𝑃_𝑡)/𝑃_𝑡

Question 44

Why economists care about Inflation (3 points)

Answer 44

• Inflation affects income distribution when not all prices and wages rise proportionally.
• Inflation leads to distortions due to uncertainty, some prices that are fixed by law or by regulation, and its interaction with taxation.
• Most economists believe the “best” rate of inflation to be a low and stable rate of inflation between 1 and 4%.

Question 45

real interest rate (or real rate of return) on an asset

Answer 45

the rate at which the real value or purchasing power of the asset increases over time.

Question 46

The nominal interest rate (or nominal rate of return)

Answer 46

the rate at which the nominal value of an asset increases over time.

Question 47

RII Equation

Answer 47

real interest rate=𝑖 − 𝜋

nominal - infl r

Question 48

expected real interest rate

Answer 48

expected real interest rate is the rate at which the real value of an asset is expected to increase over time.

nominal interest rate minus the expected rate of inflation:
𝑟=𝑖−𝜋^𝑒

Question 49

How do borrowers, lenders and depositors make financial decisions

Answer 49

how much to borrow, lend, or deposit is dependant on the basis of the real interest rate they EXPECT to prevail.

Question 50

if expectations are correct i.e expected and actual inflation is correct then ____________

Answer 50

the expected real interest rate and the real interest rate actually received will be the same. i.e., → 𝜋=𝜋^𝑒

Question 51

Difference between GDP and GNP

Answer 51

GNP is the market value of final goods and services newly produced by domestic factors of production during the current period, whereas GDP is production taking place within a country.

Thus, GNP differs from GDP when foreign factors are used to produce output in a country, or when domestic factors are used to produce output in another country.

Question 52

NFP definition

Answer 52

NFP = net factor payments from abroad, which equals income paid to domestic factors of production by the rest of the world minus income paid to foreign factors of production by the domestic economy.

Question 53

A country that employs many foreign workers will likely have _____ NFP, so GDP will be _____ than GNP.

Answer 53

negative ; higher

Question 54

How are net exports, net factor payments from abroad, and the current account balance related?

Answer 54

The sum of net exports (NX) and net factor payments from abroad (NFP) equals the current account balance (CA). This relationship is given as NX + NFP = CA.

Question 55

If A lends to B, and expected inflation rate is

(i) HIGHER than expected
(ii) LOWER than expected

who benefits in the above circumstances?

Answer 55

(i) B gains from unexpectedly high inflation, because B repays the loan with dollars that aren’t worth as much as was expected.
(ii) A gains from unexpectedly low inflation, because A gets repaid with dollars that are worth more than was expected.